Gulf currency peg under pressure

Central banks trying to deter bets on appreciation as currencies scale record highs.

Wed Nov 28 2007 17:16:11 GMT+0000

Kuwait is the only Gulf oil producer so far to have dropped its currency peg to the US dollar [AFP]

Lower interest rates risk stoking inflation, which is at decade highs across the Gulf.

Although central banks are cutting interest rates to defend their pegs, markets expect they will eventually give up and follow Kuwait's lead in unshackling their currencies from the dollar to focus on fighting inflation.

Flexible rate

Kuwait, which now has a flexible exchange rate, let the dinar fall twice in one day, the first time it has done so since it broke ranks with its neighbours and scrapped the dollar peg on May 20.

The Saudi riyal hit a 21-year high and the Qatar riyal a five-year high, extending a rally that began when Sultan Nasser al-Suweidi, the UAE central bank governor, called this month for Gulf central banks to switch from fixed pegs to a currency basket including the euro.

The Dubai-based Arabian Business magazine said on Wednesday that a UAE revaluation of 3-5 per cent could come on the National Day holidays on Sunday and Monday or the Muslim holidays of Eid al-Adha, which begin around December 20.

"The plan is to make an announcement when the banks are closed - National Day is an option, and if not National Day then the Eid holidays later in December," Arabian Business quoted a source close to the central bank as saying on its website.

The report's author, Anil Bhoyrul, told Reuters the source was not at the central bank.

Possible date

A National Day revaluation is unlikely because it would coincide with a summit of Gulf Arab rulers in Qatar on December 3 and 4, analysts say.

Al-Suweidi has repeatedly said he would only act in concert with other Gulf states preparing for monetary union as early as 2010.

He and other central bankers say the final decision on currency policy would be made by Gulf Arab rulers.

Still, bids on the dirham were as high as 3.6600 per dollar, the strongest according to Reuters data going back to 1990.

The currency, which has been fixed at 3.6725 per dollar since 1997, is on track to make its biggest one-day gain on record.

Bids on the Saudi riyal hit 3.6900 per dollar, the strongest since 1986, and bids on the Qatar riyal peaked at 3.6250 per dollar, the highest since November 2002.